Options Trader: Monday Outlook

Which way will our manic-depressive market head today?

Georgia signed a cease-fire over the weekend but Russia is still attacking them.  I think the word Georgia is looking for is surrender, not cease-fire and Russia wants to hear the magic word before stepping down.  There’s nothing like the possibility of World War III breaking out to make investors nervous.  Georgia fighting a war with Russia is about as foolish as if the state of Georgia fighting a war with the US - it’s over before it starts and the real danger is who else gets dragged into the conflict.

Georgian officials said their only way out of the conflict was for the United States to step in, but with American military intervention unlikely (we hope!), they were hoping for the West to exert diplomatic pressure to stop the Russian attacks.  "Georgia is a sovereign nation, and its territorial integrity must be respected,” President Bush said at the Olympics in Beijing. “We have urged an immediate halt to the violence and a stand-down by all troops. We call for the end of the Russian bombings.”   Georgia is one of the last members of Bush’s "coalition of the willing" with 2,000 troops in Iraq and the government has already requested they be airlifted back to Georgia to aid in the fighting at home.

I’m expecting this to be resolved early this week and it should provide a good excuse for a market rally so we’re going to keep our eye on that one.  We have a lot of economic news this week starting with tomorrow’s Trade Balance and Treasury Budget followed Wednesday by Import/Export Prices, Retail Sales, Business Inventories and, of course, Crude Inventories.  Thursday we get the always misleading CPI report along with Jobless Claims and Friday we have the NY Empire State Index, Industrial Production and Capacity Utilization, Michigan Consumer Sentiment and Net Foreign Purchases, which hopefully match our monthly deficit of $70Bn (see tomorrow’s Treasury Budget).

We had our political postings over the weekend so I won’t comment on the chart above - you can blame whoever you want and elect whoever you think is most likely to do something about this before our debt exceeds our $13Tn GDP (assuming that doesn’t collapse), I’m certainly not here to place very obvious blame or point fingers at people whose policies would be more of McSame (oops, Freudian slip there!).  Even if you don’t like politics, please check the end of the Weekend Reading Post as candidate McCain did inspire me to run a PSW contest in which the most shameless readers will be able to win a free year’s subscription.  Mainly I’m curious as to how well something like this works as I’m trying to get an idea of how much of McCain’s apparent support is legitimate and how much is the result of bribes…

The Nikkei flew up 262 points this morning as the strong dollar boosted exporters (that’s pretty much everyone in Japan) and oil was still down around $115 during their trading but has creeped up as the war concerns European traders.  The Hang Seng was flat but the Shanghai Composite fell to the 5% rule, making a 19-month low as Stagflation replaces Olympics as the biggest concern in China.  Nonetheless, China’s trade surplus was up, hitting it’s best level in 8 months but it’s possible that the economy has grown to the point where it can no longer thrive on exports (+$25Bn, up 4% from last year) alone.  China’s PPI was up 10% in July - 4% growth and 10% inflation — not good!

Europe is improving as the morning goes on, now up about half a point (8am) and generally at 6-week highs.  Unfortunately, oil companies are leading the markets as they bounce off their bottoms and oil goes back over $116 on war concerns - not exactly the sectors we were rooting for.  House prices continue to plunge in the UK and, unlike the US, earnings expectations have not been so pessimistic for EU companies so beware of adjustments as Europe enters into its own housing crisis.

I mentioned in the weekend post that 8 people paid $1,000 at the IPhone Store to display a picture of a ruby on their phones.  We figured if 8 people were doing that there must be millions of people buying other programs and it turns out that AAPL users have already downloaded 60M programs for the IPhone in the store’s first month.  The average daily revenue for Apple’s (AAPL) latest success is $1M per day, on pace to make $360M but, if we assume people buy more and more IPhones, we could be looking at yet another $1Bn a year dropping to AAPL’s bottom line down the road from yet another source of revenues that is not factored into the estimates.  The company "only" made $3.5Bn last year so another $1Bn would be pretty significant, as would the rumored 40M IPhones that are in the production loop already, over 3 times the sales estimates!

Sega sold 300,000 copies of its $9.99 Super Monkeyball game in 20 days.   "That’s a substantial business," says Simon Jeffery, president of Sega’s U.S. division. "It gives iPhone a justifiable claim to being a viable gaming platform."  Another hit comes from Epocrates Inc., a maker of electronic reference guides for physicians that has developed a free drug encyclopedia for the iPhone. More than 125,000 people have downloaded the software, including 25,000 doctors.  It will be interesting to see how long they can hold this stock down, most likely it will take off after Friday’s expiration day next week.

My current favorite AAPL position is the Jan $170s at $19.80, selling the current $170s for $3 and then selling the Sept $170s for $8 on Friday which offsets more than half our January premium in 5 days with 3 more months to sell after September 19th expiration. 

Speaking of expirations, September NYMEX contracts expire on Aug 20th (next Wednesday) and the crooks still have 235M barrels to dump between now and then.  There are 175M barrels open in October and 85M open in November but December is already swelling with 177M barrels and if oil prices continue to fall, that will not be looking like a very sexy roll.  Already 235,000 contracts is low for this early in the month but there are still over 650M barrels rushing to Cushing between now and the end of the year and those contracts average $115.60 so that’s $75Bn worth of oil that needs to be dumped before they end up in inventory and drive the prices even lower.  Let the shenanigans begin!

The dollar continues to gather strength as the Euro dropped the most in 3 years last week. “What we have seen over the last few days is the recognition in Europe, in Australia, all around the world, that growth is slowing everywhere,” said Mohamed El-Erian, co-chief executive officer of Newport Beach, California-based Pacific Investment Management Co., in a Bloomberg Radio interview. “The euro is no longer as attractive as people once thought.”  In other words - The US now sucks less than Europe, that is mission accomplished for my market predictions for the year as clearly Asia already sucks, which makes US equites not great, but the least sucky place to put your money in the second half of 2008!

So happy Monday to you - it’s going to be a fun week; all we need to do is keep oil low and I have a good feeling the markets will take care of themselves…